The Federal Reserve raised interest rates on Wednesday for the first time in over three years, but this restrictive move is not expected to significantly impact commercial property transactions in the second half of 2026. The Federal Open Market Committee (FOMC) unanimously voted 12-0 to raise the benchmark interest rate by a quarter point to a range between 3.75 percent and 4 percent. This comes against a backdrop of persistent inflationary pressures, exacerbated by the war in Iran. The measure followed five consecutive rate pauses and marked the central bank's first increase in borrowing costs since July 2023.
The Fed also released its updated quarterly 'Dot Plot' matrix of individual committee members, which signalled that a further rate hike later in the year would likely be supported by 16 of the 18 FOMC participants. Fed Chair Kevin Warsh, who took office in June, has not yet participated in the Dot Plot exercise. Warsh stated at a press conference after the meeting that inflation was simply too high and had been for too long. This summer's inflation figures did not suggest that underlying trends had significantly improved.
Impact on Transactions and Financing
The FOMC reaffirmed its commitment to maintaining the central bank's long-term inflation target of 2 percent per annum, noting that recent data placed the rate significantly above this target. The Fed's Dot Plot projected the key interest rate to be 4.1 percent by the end of 2026 and to remain at that level in 2027. Since taking over the Fed chairmanship from Jerome Powell, Warsh has overseen two pauses and one rate hike in his first three meetings, irrespective of external pressure from President Donald Trump, who nominated Warsh in January. In a Truth Social post on 4 September, Trump urged the Fed to cut interest rates, or he would halt trade with certain countries.
Joseph Fingerman, President of CRE at Peapack Private Bank & Trust, explained that elevated interest rates have slowed transactional activity as higher debt service costs reduce credit returns on deals. This has led to a wider gap between buyers and sellers and requires borrowers to contribute more equity. Fingerman predicted that further rate hikes by the end of 2026 could keep refinancing conditions high and further widen the gap between property owners' cash flows and debt service expenses, particularly for rent-controlled multi-family properties where income growth is constrained.
“Industry-wide, this would likely widen the gap between well-capitalised sponsors able to bring in fresh equity and over-leveraged owners facing maturity issues,” Fingerman stated. For a fixed-rate lender like Peapack Private, this means examining new financing with higher stress rates and stronger debt service coverage buffers. The commercial property market already received a reality check regarding higher long-term interest rates ahead of Wednesday's Fed meeting, as the 10-year Treasury yield crossed the 5 percent threshold on Monday and reached its highest level since 2007 on Tuesday.
Long-Term Perspectives and Realignment
Jay Neveloff, Partner and Head of US Real Estate at HSF Kramer, commented that while rate hikes might slightly influence some prices, they would not deter the growing number of CRE investors he sees seeking deals in New York City and nationwide. He observes an increase in land deals and potential mergers being discussed and processed. Neveloff is convinced that opportunities still exist for the astute investor who does not want to sit idly by, and 25 basis points would not make a decisive difference.
Neveloff called it a “mistake” should Warsh abandon the Fed's long-standing forward guidance policy, which CRE markets frequently use to interpret central bank data when deciding whether to pursue deals. He emphasised that forward guidance helps CRE market participants avoid “surprises” and creates more predictability or stability in transactions. Ryan Koehler, Managing Director for Originations at NewPoint Real Estate Capital, noted that deals in 2026 would look different from recent years, with more refinancings involving cash-in, recapitalisations, and acquisition-related purchases of distressed properties.
Koehler noted that the elevated interest rate environment also leads to more loan sales, and banks are less willing to extend maturities. He observes significantly more lender-controlled transactions where equity has been substantially impaired or, in many cases, completely wiped out. Lenders are tired of postponing problems and recognise that today's market is much more challenging. They would rather deploy their capital elsewhere, which is why the willingness to accept losses is greater today than in the last five or six years.
